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Evaluation of the Impact and Effectiveness of the Small Business Rates Relief Scheme

2 The small business rates relief scheme

Background

2.1 Since April 1997, all non-domestic ratepayers who occupy property with a rateable value of 10,000 or less have been eligible for a discount of one penny on the poundage rate, increased to 2p in 2001-02 and 2002-03. The Report of the Scottish Parliament Local Government Committee on Non-domestic Rates, published in June 2000 ⁴, concluded that small ratepayers face a disproportionate rates burden and considered that a permanent small business rates relief scheme, more focussed than the existing 1p discount, should be introduced so long as the scheme could be designed to avoid small changes in rateable values producing large increases in rates bills.

2.2 In February 2001 a consultation paper was issued by the Scottish Executive ⁵. The consultation period on the paper ended in May 2001 and was followed by the announcement of the introduction of the Small Business Rates Relief Scheme. As of 1st April 2003, all non-domestic subjects in Scotland with a rateable value of 10,000 or less became eligible for a discount of between 5% and 50% on the poundage rate(47.8p in 2003-04 and 48.8p in 2004-05), although the relief is based on the cumulative rateable value of all the subjects occupied by the ratepayer and whether or not the property is eligible for one or more of the existing non-discretionary rate reliefs. Thus ratepayers occupying properties with a total rateable value of less than 3,000 receive 50% relief. Ratepayers occupying a property with a rateable value of more than 10,000 but less than or equal to 25,000, were to pay the standard poundage rate.

2.3 In 2003-04 the additional costs of the Scheme have been paid for by ratepayers occupying property with a rateable value in excess of 25,000 - subjects with that rateable value and above paying a supplement of 0.6 pence on the poundage rate. A note describing the methodology used to estimate that a supplement of 0.6p would be required to meet the additional costs of the Scheme in 2003-04 can be found on the Scottish Executive website ⁶. The level of this supplement was calculated based on an estimate of the numbers of ratepayers eligible for relief based on valuation rolls. In 2003-04 the supplement on the poundage rate has been reduced from 0.6p to 0.3p ⁷ to reflect the fact that the amount of small business rate relief granted by local authorities in 2003-04 was less than had been originally estimated.

2.4 The Scheme was implemented on 1st April 2003. All subjects with a rateable value of 10,000 or under will receive 5% rate relief by default. If a subject is eligible for a higher rate of relief then the ratepayer will have to apply to each local authority area in which they have property.

2.5 The local authorities have the responsibility for administering the Scheme. It is their responsibility to determine the eligibility of ratepayers for both the 5% and the higher rates of relief. All subjects with a rateable value of 10,000 or less automatically receive 5% rate relief. If a ratepayer occupies a property which is eligible for a higher level of relief then the ratepayer will have to apply to each local authority area in which s/he has a property. It is for the local authorities to satisfy themselves that ratepayers who apply for the higher (i.e. 10% or greater) levels of relief are entitled to do so. In 2003-04, local authorities were required to provide information on how to apply for the higher levels of relief as part of their annual billing exercise ⁸.

Research Evidence

2.6 The use of relief from rates payments as an instrument of policy has a long lineage in the United Kingdom - rates relief for manufacturing having been introduced in 1929 as a response to growing competition in the market for manufactured goods. However, rates relief for manufacturing was eventually abolished in Great Britain, apart from Northern Ireland. Exemption from rates for a limited period was also a feature of the Enterprise Zone initiative.

2.7 This history has given rise to a small body of research and policy review work assessing the impact of rates and rates relief and raising issues relevant to the present study. This is considered below.

2.8 It has long been acknowledged that business rates impose a relatively higher cost burden on the smallest ratepayers. Rates are related to property costs, and property tends to account for a greater share of the costs of small rather than large ratepayers. There have been two major studies that have assessed the impact of business rates on different ratepayer types and sizes.

2.9 A large scale survey in England and Wales ⁹, completed in 1995, for the Department of the Environment by IFF Research concluded that rates were not generally a significant cost burden on businesses, representing, for most companies, no more than 2% of turnover. However, the study did suggest that the impact of non-domestic rates was significantly greater for very small trading companies - i.e. those with a turnover of less than 100,000. From the analysis, size emerged as the dominant factor determining variation in the impact of rates on businesses: the effect of other characteristics such as industry sector, location or property type was less marked.

2.10 This finding on the impact on small firms was supported by DTZ Pieda Consulting's recent study in Northern Ireland. ¹⁰ The study found that while the rates bills that would fall on manufacturing businesses in the event of the abolition of de-rating were equivalent to 0.4% of turnover on average, this rose to 4% of turnover for firms with turnover of less than 100,000 pa. Similarly, while for all firms the prospective rates bill would equate to under 3% of profit, this rose to 10% for firms with a turnover of under 500,000 pa. The results were not dissimilar to those in the IFF study.

2.11 Similar conclusions can be drawn from survey evidence. The Federation of Small Businesses (FSB) undertook a survey of members when responding to the review of rating policy ¹¹ (FSB membership covers around 13,000 businesses in Scotland). The responses indicated that small businesses were suffering disproportionately from business rates, paying on average ten times relative to profit and turnover more than larger businesses. This suggests that there should be a noticeable benefit from business rates relief to these ratepayers.

2.12 There is less evidence concerning the impact of these cost burdens on the behaviour and performance of companies. The FSB survey mentioned above suggested that some start up companies might find business rates prohibitive in the early stages of the business. It is also the case that rates are perceived as an important issue by many ratepayers. For example a survey of members of the Forum of Private Business (25,000 members UK wide) showed that the rates bill was the main concern of members before the rates relief and now it is only 4th most important except for those in the hotel trade ¹².

2.13 As mentioned above, DTZ Pieda Consulting conducted a study in Northern Ireland on the impact of the system of de-rating for manufacturing industry. The study sought to assess the likely impact of the removal of de-rating - a step which would have more substantial financial consequences for business than those associated with the SBRRS. The study assessed this impact through the analysis of the cost effects - as discussed above - through surveys of firms and through the analysis of the relative performance of the manufacturing sector. The last point is of particular interest. Given that de-rating benefited only manufacturing, one might expect, if the benefits to business were substantial, that the manufacturing sector would perform well relative to the service sector (which pays rates). There is, of course, always a problem in constructing a hypothetical alternative - i.e. "how would manufacturing in Northern Ireland have performed if firms had had to pay rates?" The study observed that, over the long term, manufacturing in Northern Ireland had experienced periods of strong performance relative to UK comparators but it also concluded that there was no evidence that these periods of relative strength were related to the effects of de-rating nor did the recent relative performance of the service sector suggest that it had been handicapped by the requirement to pay rates.

2.14 There has also been some research into the effect that business rate changes have had on property rents. A DTI study ¹³ suggested that there was a negative relationship between non-domestic rates and rents, i.e. increases in rates resulted in lower property rents. This may suggest that the introduction of a small business rates relief might lead to higher rents. To the extent that this is true, the benefits of the scheme could be fully or wholly offset for those firms that are tenants. For firms which own their property, the effect of a general rise in market rents would be to increase the capital value of their asset, which can be counted a business benefit.

2.15 While, as noted above, there is evidence that the incidence of property taxes, such as rates, can be shifted by the response of the market, there is insufficient evidence on which to assess such impacts in Scotland. The Scheme has only been in operation for a short time and most rents are reviewed periodically. More fundamentally, a rigorous analysis would require a time series data set on industrial and commercial rents that is not readily available.

Conclusions

2.16 The SBRRS aims to reduce the burden of rates on firms, specifically on small firms. The intended targeting is achieved by restricting relief to the 70% of subjects occupying premises with rateable values of 10,000 or less - it being reasonable to assume that such firms will themselves be small. The Scheme cannot be perfectly targeted as it includes an automatic relief of 5% of rates on properties below the Scheme threshold and it is the case that there will be some relatively large firms that occupy a number of low rated premises in different areas. The importance of this element of deadweight is unclear, the rational was that in its present form the Scheme should be simple to administer even if for example a large chain of small shops are eligible for the 5% relief on each one. It can be argued in any case that the 5% abatement merely replaces an earlier relief.

2.17 In targeting smaller firms the Scheme is following the lessons of the existing body of research and knowledge. Rates represent a higher proportion of the costs and profits of small firms than of large. However, the evidence that rates are an important factor in affecting the behaviour or performance of even small firms is very limited. The existing literature suggests that the SBRRS is well targeted, but also raises questions over the likely effectiveness of the Scheme.

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